City's high-fliers face huge tax clampdown

THOUSANDS of wealthy City financiers face a new Governmentled purge of their pay arrangements. International banks with hubs in the Square Mile and Canary Wharf are running scared over concerns that they will be a hit with massive backdated bills for unpaid tax for dealmakers on their UK books.

Senior London banking figures are considering whether to pull scores of their star fee earners from the capital to other European financial centres with cheaper personal tax regimes.

The latest City fears stem from an April bulletin from the Inland Revenue, which for the first time set out clear guidelines on what it sees as an abuse of legitimate means for workers to have two employment contracts.

Dual contracts allow jet-setting deal brokers to pay UK rates of tax on income from work in this country while using another contract with an overseas part of the same bank to pay often lower rates of tax for income from foreign-based deals.

Banks have begun to panic after months of briefings from tax advisers and a surge in Revenue investigations, City lawyers report. The bulletin from the Revenue, under chairman David Varney, says employers 'artificially divide a single job' if they use geography alone to distinguish 'separate and distinct' sets of employment.

This means phone calls or emails out of London containing advice for an overseas client may now be treated as generating fees for a worker's UK contract even if the deal is taking place overseas.

Edward Reed of City lawyers Macfarlanes warns: 'The killer blow is the Revenue guidelines that say it could also bring into the UK tax net all of your otherwise legitimately earned overseas contract - so it is not just a proportion of the earnings which is hit but the whole lot.'

The London Investment Banking Association is understood to have briefed the Government about the readiness of some banks to move staff overseas if they feel the Revenue unfairly targets them.

KPMG partner Colin Ben-Nathan said: 'The Revenue wants to put down a marker for the City. It is 'We think a lot of the arrangements are a bit flaky and we are going to go for them'.'

One senior banking representative said employee tax was a 'determining factor for staying or quitting London and it has gotten bigger'.

• WITH the Inland Revenue promising to act over controversial dual-contract schemes, the City's big moneymakers are finally starting to sweat.

Businesses are thought to have enjoyed informal deals with the Revenue to approve dual contracts for top staff. But tax inspectors are now studying some of these pay arrangements. The international nature of these was exposed in the £7.8m discrimination battle between London-based Stephanie Villalba and Merrill Lynch.

It emerged Villalba had three separate contracts with different elements of Merrill's businesses, with her salary a fraction of bonus-driven remuneration.